10 CHAPTER 1. WHY DOES THE EXISTENCE OF BORDERS MATTER FOR FINANCE?
imports, and so on—you name it.
In OECDcountries or NICs, this type of restrictions is now mostly gone. In
December 2006, Thailand imposed some new regulations in order to discourage
inflows—usually the objective is to stop outflows—but hastily reversed them after
the Bangkok stock market had crashed by 15 percent; this example goes to show
that this type of restriction is simplynot doneanymore. But some countries never
lifted them altogether, like Chile, while in other countries the bureaucratic hassle is
still strongly discouraging (India) or virtually prohibiting (Russia) capital exports.
There are two repercussions for corporate finance. One is via the shareholders.
Specifically, in countries with serious restrictions on outward investments, the invest-
ment menu is restricted and different from the opportunity set available to luckier
investors elsewhere. This then has implications for the way one works with theCAPM:
companies in a walled-off country have to define the market portfolio in a strictly
local way, while others may want to go all the way to the world-market version of
the market portfolio. So companies’ discount rates are affected and, therefore, their
direct investment decisions. Another corporate-finance implication is that a com-
pany that wants to issue shares abroad cannot simply go to some “international”
market: rather, it has to select a country and, often, a segment (an exchange—which
exchange? which board?—or the over-the-counter market or the private-investors
segment), carefully weighting the costs and benefits of its choices. An important part
of the costs and benefits have to do with the corporate-governance and disclosure
ramifications of the country and market segment one chooses.
1.1.6 International Tax Issues
Fiscal authorities are understandably creative when thinking up excuses to tax.
For instance, they typically want to touch all residents for a share in their income,
whether that income is domestic or foreign in origin; but they typically also insist on
taxing anybody making money inside the territory, whether the earner is a resident
or not. So a Icelandic professor making money in Luxembourg as visiting faculty
would be taxed by both Luxembourg—she did make money there—and by Iceland—
she is a resident there.
In corporate examples things get even worse. When an Icelandic corporation
sets up shop in Luxembourg, the subsidiary is taxed there on its profits: it is a
resident of Luxembourg, after all. But when that company then pays a dividend
to its parent, both Luxembourg and Iceland may want to tax the parent company
again: the parent makes money in L, but is a resident in I.
Fortunately, legislators everywhere agree that double or triple taxation maybe
somewhat overdoing things, so they advocate neutrality. But, as we shall see, there
is no agreement as to how a “neutral” system can be defined, let alone how it is to
be implemented. This makes life for theCFOcomplicated. But it also makes life
exciting, because of the loopholes and clever combinations (“treaty shopping”) that